Comments on the Rationality of Human, and their Behavior in Finance

I’ve heard way more things about the behavior economics recently in class, on TV(CNBC), during lunch at Fisher, and even in a conversation in my dream (just kidding).  Economists, Psychologists, and Financial managers spend years and years trying to figure out their own behaviors-“why are we humans making so many irrational decisions which deviate so much from what they expect them to be, or what they could benefit from?” They want to find some sorts of laws, rules, or some patterns that could explain such phenomenon well.

Scholars make this even more complicated. So far, they could only say “some” of those activities and decisions are just irrational. I’m not going to explain what the behavioral finance is since you can Google it, right? All I want to say from my observation on behavior rationality is that: that people are irrational or making irrational decisions is because there are three things happening that distract them from realizing their target or goals. These things are:

  • Concerns over what other people do in a similar situation
  • Events that are in favor by the people but twist the outcome
  • Incorrect interpretations of problems

“Concerns over what other people do in a similar situation” refers to that people would chose the solutions that are not optimal or even are opposite when taking other people’s solutions into account.  For example, when you wanted to buy Apple’s shares but you found out that everybody else bought Google’s shares, so you bought Google’s share instead even though your 10-hour homework made you believe that Apple is going to blow out after tomorrow’s earning report.

“Events that are in favor by the people but twist the outcome” refers to that things that are happening within the processes of achieving goals are what you preferred but change your optimal solutions.  For example, you had a car accident because you saw an attractive person walking down the street which distracted you. In this situation, looking at the attractive person is what you preferred. But it increases the risk of car accident, twisting your optimal solution which is to drive safely to your destination.

“Incorrect interpretations of problems” leads to wrong decisions that what you know already.

If you are interested in behavior finance and want to discuss it, contact me.